On Thursday, July 1, 2021, Governor Mike DeWine signed House Bill 110 (H.B. 110) into law after vetoing 14 different provisions in the bill.
Summary of Ohio Tax Changes
- Provides municipal income tax withholding guidance to employers and remote workers and addresses 2020 and 2021 municipal income tax refunds from principal place of work municipalities
- Reduces the top personal income tax rate from 4.797% to 3.99% for tax years beginning on or after January 1, 2021
- Eliminates the sales tax on employment labor services and employment placement services
- Allowed Commercial Activity Tax exclusions of BWC Dividend Refunds to become permanent
- Streamlined many tax incentive programs and extended or created several new tax incentive programs for taxpayers retaining or creating jobs in Ohio
Local Municipal Income Tax Withholding
As most Ohio taxpayers are aware, Ohio’s emergency order ended June 18, 2021 and with that the withholding changes under H.B. 197, which required employers to continue to withhold local municipal income taxes based on an employee’s principal place of work, expired 30 days after on July 18, 2021. However, in order to assist employers as they evaluate their post-COVID return to work policies and procedures, H.B. 110 allows, but does not require, employers to extend the H.B. 197 withholding procedures through December 31, 2021. Effective January 1, 2022, employers will be required to return to the pre-COVID 20-day rule.
Although many employers benefited from COVID withholding provisions under H.B. 197, many employees were adversely impacted when they changed their COVID work locations to a lower or no tax municipalities. The newly passed H.B. 110 will allow employees to file refund claims with their principal place of work municipality for days that they did not work within the withholding city during 2021 only. However, refunds for 2020 will depend on the outcome of several court cases filed in Ohio and nationally, it will likely take many months before we know the outcome.
The Ohio Regional Income Tax Agency has posted on its website that it will allow refunds to be filed for 2020, but will not process until the various court cases are decided, which may take many months.
Individual Income Tax Reductions
As has been included in several of the past budget bills, Ohio will reduce the number of tax brackets from six to five and apply lower tax rates to each of the new brackets. While most brackets include a 3% rate reduction, the largest reduction applies to taxpayers earning more than $110,650 with a reduction in the tax rate from 4.797% to 3.99%. Also, for tax years beginning in 2021 Ohio income tax is completely eliminated for those individuals earning $25,000 or less.
Personal Income Tax Bracket and Rate Comparison Between 2020/2021
|2020 Tax Rates||2021 Tax Rates|
|$0 - $21,750||0.000%||$0 - $25,000||0.000%|
|$21,751 - $43,450||2.850%||$25,000 - $44,250||2.765%|
|$43,451 - $86,900||3.326%||$44,251 - $88,450||3.226%|
|$86,901 - $108,700||3.802%||$88,451 - $110,650||3.688%|
|$108,701 - $217,400||4.413%||$110,651 and above||3.990%|
|$217,401 and above||4.797%|
Additional Individual Income Tax Changes
Ohio’s new budget includes several new deductions and credits:
- Increases the Opportunity Zone Investment Credit available to an individual from $1 million to $2 million
- Conforms Ohio to federal railroad retirement benefit exemption
- Allows a credit up to $250 on purchases of supplies by homeschoolers
- Allows up to a $750 annual credit on charitable contributions made to a nonprofit scholarship granting organization (SGO) for low-income primary and secondary school students (Once certified the Ohio Department of Taxation will post a list of qualifying SGOs)
- Permits a nonrefundable income tax credit on private school tuition — $500/$1,000 credit for families with Federal Adjusted Gross Income (FAGI) less than $50,000/$100,000
Income Tax Deductions on Qualifying Capital Gains
Although not effective until tax years beginning on or after January 1, 2026 there are will be two capital gain changes for business taxpayers.
1.) Capital Gains from the Sale of a Business - Permits a capital gain deduction for taxpayers who materially participated (not defined yet) in a business that was headquartered in Ohio for the five (5) preceding years or made a venture capital investment of at least $1 million in a qualifying business.
The capital gain deduction is equal to the lesser of the owner’s capital gain or 50% of the business' qualifying payroll after applying the taxpayer's ownership percentage. The deduction should be calculated by an owner on an entity-by-entity basis.2.) Venture Capital Investments. Provides a capital gain deduction for all or a portion of capital gains received by investors on the sale of their equity interests (does not appear to apply to asset sales) in certain Ohio based "venture capital operating companies" (VCOCs) that are certified by the Director of Development.
- A VCOC is considered Ohio based when more than 50% of their full-time equivalent employees are residents of Ohio.
- In order to qualify for certification, a VCOC must manage or have capital commitments of at least $50 million in active assets, and Ohio residents must constitute at least two-thirds of its managing and general partners.
- Taxpayers can receive a 100% capital gain deduction for amounts received from a qualifying interest in an Ohio VCOC attributable to the company's investments in Ohio businesses. An investor can also receive a 50% capital gain deduction from a qualifying interest attributable to an Ohio VCOC’s investments in all other businesses.
Employment Services and Employment Placement Services
Another change that came about was the repeal of the taxation of employment services (temporary labor services) and employment placement services. Since the bill was signed by Governor DeWine on July 1, 2021 it will become effective on October 1, 2021, 90 days after it was signed. According to the input received from many taxpayer’s, Ohio sales tax on temporary labor and employment placement services put Ohio employers at a disadvantage compared to their competitors in neighboring states that do not tax these services.
Also, Ohio also reinstated the sales tax exemption on qualifying investments in metal bullion and coins, effective for transactions occurring on or after October 1, 2021.
Commercial Activity Tax (CAT)
- Bureau of Workers Compensation Dividends (BWC Dividends) - Earlier this year Ohio enacted S.B. 18 to specifically exempt from Ohio’s CAT the 2020 and 2021 dividend refunds employers received. Under the new budget, these changes become permanent.
- CAT Minimum Tax. The new budget also requires that taxpayers calculate the annual minimum tax applicable to the first $1 million in taxable gross receipts based on the taxpayer’s taxable CAT gross receipts reported in the prior year, rather than the current calendar year. Please contact us with any questions.